Thursday, July 14, 2016

Why We Get More Policing Than We Need: It's 'Free'

Why We Get More Policing Than We Need: It's 'Free': In a press conference Monday, Dallas Police Chief David Brown admitted that the American propensity for sending the police to deal with every minor social problem has failed:“We’re asking cops to do too much in this country” said Brown.

Permit me to provide an additional commentary, as it will simply provide some additional analysis upon this subject. Please note this is not a moral analysis of Government services, or Public Goods, but merely a cursory economic analysis of it. That sort of analysis can be covered by a meta-physician.

1. Moral Hazard-Law enforcement services is a public good. As is the case with most public goods, the price system structure is removed. To wit: The customer does not know the exact "price" for that service. The service is subsidized by the tax payers of the local municipality, but it is not paid each time the cops come out, for example. Hence, the tax payer has the proclivity to "over utilize" the service. The article points this out clearly.

2. Tragedy of the Commons-Due to the fact that the Public Good has no true "ownership", the ownership is the "collective" or the state, over-utilization, as seen in the first example of moral hazard ensues. Scarce resources are mis-allocated, and lost, as this an economic cost to the operation.

Monday, July 11, 2016

More thoughts on the concept of the Trade Deficit

Mainstream commentators and analysts taut how the notion of having a trade deficit hurts the economy of the nation receiving the imports. They cite stats and these stats are never given any explanation or rational support. Next, the presuppose that the stats, can provide axiomatic proof that trade deficits are harmful for the economy.  As I have previously stated, the notion of a  trade deficit is fallacious. The notion of free trade benefits all parties involved, as it is a net benefit for the participants in the trade.

Empirical Evidence is misleading

In the attempt to transfer Economcs into a "hard" science, e.g. physics, chemistry, etc, many attempt to employee stats as empirical proof to uncover new Econ "laws".  While these attempts should be applauded for an intrepid effort, the fact still reminds that economics is not a "hard" science, and it's laws are uncovered via rational analysis, as it is done in geometry. Empirical evidence is done ex post facto(after the fact).

A Priori vs A posteriori analysis

Many mistakenly state that economics is a science that is developed using math models, stats and calculus. Of course, these tools are vital in assisting economists in understanding historical outcomes, but the science is developed from a priori analysis. An a priori analysis results in the development of axioms that are universally true and necessary. These things are true, prior to our understanding, cognition and existence. On the other hand, an a posteriori analysis is based upon our personal experience. With the notion of demonstrating the benefits, or better still, the flaws of Free trade, empirical evidence falls short. Empirical evidence must be structured in such a way that it is consistent of the a priori analysis in order for that proof to be relevant.  Critics of free trade use empirical evidence to claim the flaws of free trade. As this part demonstrates, this critique by those critics of free trade falls short.

Free Trade is a Benefit

Free Trade is determined as a benefit, not based on a posteriori, or empirical evidence, is determined by a priori analysis. It is a benefit for both parties involved in the trade. As previously stated on this blog, free trade action is rooted in the law of marginal utility. Both parties improve based on this unequal exchange of value. The accounting of the exchange is equal, despite the false claims by the critics of free trade, but the items traded have varying values respective to the two parties' individual utility ranking of goods. However, since humans are constantly seeking to serve their self interest, both parties are trading for their benefit. It is not a zero sum game, or to wit: trade does not comprise a winner vs a loser in the exchange.


Critics of Free Trade are incorrect in stating that one party does not benefit from trade. This can be proven with a priori analysis. While using empirical evidence is helpful, it is limited in its use to debunk the benefits of trade. Trade, at its core, is between two parties, as both parties voluntarily seek to improve their situation with the end results of the trade. Placing restrictions, barriers, and additional regulation on that exchange, simply makes it more difficult for both parties to win. In short, trade is a win/win for all parties involved. 

Thursday, June 30, 2016

Milton Friedman - Our Limited Resources

The Process of Capital Formation

Capital formation is a process that is vital to help facilitate economic growth. With an upward trend in economic growth, new jobs can be created, technology, innovation, and etc. With regards to the concept of Capital, it comprises many items, viz: Money, equipment, Real Estate, machinery, etc etc. With regards to this article, the focus of Capital Formation will be simply cash and its equivalents.

How is Capital Formed?

It all starts with human action. Humans seek to improve their circumstances via voluntary exchange. Voluntary exchange takes place, as the actors in the marketplace continue to produce and trade. In this process, humans will seek to place some "capital" aside. They may place it in a mattress, coffee can, a hole in the backyard, a pillow, or with a financial intermediary. Some examples of a financial intermediary are as follows: A bank, credit union, investment brokerage, and insurance company. Once the actors begin the process of production, some of the "savings" goes into the bank. This is the start of the process on how capital is formed.

The Role of the Financial Intermediary

As actors in the market begin to produce and engage in Voluntary exchange, the money is stored in a financial intermediary. Financial intermediaries, in turn, seek to "grow" their capital base. This base comes from the depositors. The financial intermediary seeks to market loans to others in the market place. These loans, limited to the scope of our analysis, are used to help business owners acquire capital equipment, fund labor, purchase real estate, and other economic inputs. 

The Natural Rate of Interest

The concept of the natural rate of interest is derived from the Law Of Marginal Utility. In short, it is the ratio between present goods and future goods.  With that ratio, and other factors(risk, etc), the financial intermediary charges interest for borrowers.  Another point to add: it is indicative of the temporal preference of things on the individual's utility ranking. Each of our actions precede the next action. Those actions we select first are preferred over the latter actions. If those actions involve some voluntary exchange, with prices used in the exchange, the interest rate can be calculated...somewhat. In our analysis, the actor simply defers his capital for present consumption and places it into a financial intermediary. For those who use the bank to store capital, the bank provides an interest rate on those monies.  This rate of interest acts as a signal to the actors in the marketplace, as it is tantamount to a price. The rate of interest will fluctuate as the actors are constantly moving towards an over all equilibrium. In an un hampered market, all the actors in this scenario, seek to balance present needs vs future needs. 


With the process of capital formation, it begins with productivity. The actors involved in the labor market place aside some of their earnings, as they prefer to use that portion for future consumption. In turn, financial intermediaries loan out monies from this capital base to business owners, individuals and the like to help them acquire assets. 

Wednesday, June 15, 2016

Central Bankers Are Wrong About Inflation and Deflation

Central Bankers Are Wrong About Inflation and Deflation: The majority of economists view deflation as a general decline in prices of goods and services. This is viewed as a major threat to the public’s well-being for deflation is seen as a major factor that plunges the economy into an economic depression.

Sunday, June 12, 2016

The Method of Mises: A Priori and Reality

The Method of Mises: A Priori and Reality: Aprioristic reasoning is purely conceptual and deductive. It cannot produce anything else but tautologies and analytic judgments. All its implications are logically derived from the premises and were already contained in them.

Note: Immanuel Kant's influence is seen in this excerpt.

Sunday, June 5, 2016

US Job Growth Rate Hits 28-Month Low

US Job Growth Rate Hits 28-Month Low: The Bureau of Labor Statistics released new employment data today, and nonfarm payroll employment increased in May be the smallest amount seen in 28 months.

The Week in Review: June 4, 2016

The Week in Review: June 4, 2016: Today’s jobs report placed US job growth at a 28-month low, another illustration of how fragile the American economy truly is.

Wednesday, May 25, 2016

The Early History of Regulated Health Care

The Early History of Regulated Health Care: [Editor's Note: This Q & A with Dr. Michel Accad, M.D. on the economic history of modern medicine covers the 'pre-Flexner era' to the Great Depression. Part 2 will feature the period from the the Great Depression to today.]

Sunday, May 22, 2016

David Hume - The Great Empiricist & Skeptic

Prices: How are they derived?

Bread $2.00/loaf. We see this at our local grocery store. This price sends a signal to us. If it does, what signal is it sending? It is obvious that the $2.00/ loaf is the signal, prima facie. Yet, there is more to this process.

Prices are signals to both parties in the free trade process. However, how are they derived?

In the past, free traders used barter to exchange goods. The "prices" of those goods were expressed in the other good that was needed by the seller. For example: If a seller of a cow needed two hens, the price would be two hens. 


As barter was replaced with money, the unit of money represented the price.(e.g 1 hen= 2 gold coins) This made the process more efficient for both sellers and buyers on the transaction.  With the case of money, prices are stated in terms of money, as in this example, the number gold coins.  With money, we can carry it forward with currency, as the prices would be expressed in terms of the respective currency type. (e.g. USD, Euro, Pound, etc)

Price and Subjective Value

Money is a means to do multiple things. It helps maintain a level of recordkeeping or accounting of transactions, as we previously discussed since prices are presented in terms of money.  Money also is used to "store value". This concept of "storing value" is a curious one, since value is subjective. While this is true, the money used may not and does not measure all the value expressed in the transaction. However, we can see what things people  value over another based on the law of marginal utility. Hence, prices play an active role in helping the economic actor to evaluate his utility preferences. 

Prices, therefore, are spawned out of a need to attempt to quantify subjective value for the economic actor. As the actor is moving to improve his situation, he goes to acquire more "stuff". In this pursuit, he will make choices on the acquisition of "stuff" based on his preference ranking. Note: this preference ranking is dynamic, thus it is constantly changing.  


Prices act as a valuable tool in the free market process. They provide vital information to the economic actors. The primary purpose for prices is the attempt to project value in terms of the money displayed. While prices can not quantify the true value for the economic actors, it does provide a way for the actor the ability to prioritize his wants and needs accordingly. 

Saturday, May 7, 2016

Econ Thought: The Law of Marginal Utility

In the study of economics, the Law of Marginal Utility is one of the key axioms to the entire body of knowledge. What are the key components that make the Law of Marginal Utility possible?  There are two: the Law of Non-Contradiction and Transitive Property

Law of Non-contradiction

This law of logic states the following: Something can not be itself and not itself at the same time. Using symbolic logic, (A) can not equal (-A). (A) must equal (A). Another translation of the Law of Non Contradiction is the following: The same object, or same person, can not be at two different points in space and time simultaneously. For example, one can not be at the movies, and not be at the movies at the same time. One can be at the movies at one point in time, then later in time, not be at the movies. Since someone can not be at two places at once, this forces the actor to prioritize his actions.

Transitive Property

Since the actor can only be in one place spatially and temporally, the actor picks one good, or activity, at a time.  If there are multiple activities, the actor must chose the sequence he prefers in a ordinal fashion, as time progresses. Hence, it is a play on the transitive property: If good (a) is preferred over good (b) and good (b) is preferred over good (c), then good (a) is preferred over good (c). Based on this property, the actor can show which goods he prefers over the other goods at that particular point in space and time.

Supply and Demand Curves are Created

From these two laws of logic, The Law of Marginal Utility is created. Based on this law, the downward sloping, from left to right, demand curve can be graphed. This demand curve, as time progresses, the price, as an expression of value, declines on the margin for each unit is purchased.  Conversely, the upward rising, left to right, supply curve can be graphed. This supply curve, shows that over time, as the need of the supply increases, the value of each unit increases, as expressed in the higher price on the margin per unit sold. The mid point where these two curves intersect is known as the equilibrium price.

Wednesday, May 4, 2016

Gross Calls for Helicopter Money

Mr. Gross' calls for Helicopter money is based on an unstable economic rampart. The notion that increasing the money supply will some how cure "Deflation" is risible. First, one needs to determine the cause of the current plight. The current plight is caused by the notion that a Central Bank can accurately calculate the natural rate of interest. Since the natural rate of interest is based on the notion of the inter-temporal personal utility preference, it is impossible for any human to accurately calculate this ratio.

Since the Fed, or any Central Bank, can not accurately calculate the natural rate of interest, the economic price fixing game is played in the capital markets. This provides grounding for volatile swings in various capital markets.

Gross Calls for Helicopter Money: Legendary investor Bill Gross calls on the Fed to bring about Friedman's 'helicopter money.' The idea of helicopter money was introduced by Chicago school economist Milton Friedman in 1969.

Tuesday, May 3, 2016

New ACA Study: Mercatus Center

Key Excerpt:

"The ACA established the reinsurance program to assist insurers offering ACA-compliant plans so insurers could charge lower premiums and attract more enrollees as the law’s changes took effect. These payments are an explicit subsidy benefitting individual market ACA-compliant plans financed by fees on nearly everyone with private insurance.

Prior to insurers setting their 2014 premiums, the Department of Health and Human Services (HHS) announced that it would pay insurers 80% of the cost of claims incurred by enrollees between $60,000 and $250,000. As an example, an insurer could expect to receive a payment of $112,000 for an enrollee with $200,000 in claims ($200,000 − $60,000 = $140,000 x 0.8 = $112,000). The Congressional Budget Office estimates that insurers were able to reduce premiums by 10% in 2014 because of expected reinsurance payments. "

Read the rest here:

Why Tariffs are Harmful

In the current Presidential campaign, much attention has been given to the trade with China or Mexico. Many have complained regarding the trade deficit and how it has impacted jobs. "We need jobs!", says the politician.  So, the proposal to "get jobs back" is to raise tariffs on China. Will this work? Answer: No.

A simple example: Inventory

Suppose that you owned a store. And, you sold only one good. That good was green beans. Your price of your green beans is based on many factors, one of which is the amount of green beans you had in your inventory to sell. In your process of doing business, the farmers that produce green beans discovered some sort of fungi that was destroying the green beans or making them unsuitable to eat. What happens next? In this case, the total inventory of green beans is shrunk, causing the prices of green beans to rise, with the demand remaining constant. 

Tariffs act as the fungi in trade, using our example. It simply is a tax that shrinks the overall inventory of that good, thus making the price if this good higher. Politicians assume, to wit, falsely assume, that they will raise more tax revenue by employing higher tariffs. While this seems workable on paper, in reality, humans will re adjust their purchasing preferences, due to the increased prices. The revenue generated from the tariffs will decrease. This action is tantamount to raising taxes to increase revenue. 

Raising Tariffs: It does not create Jobs

Job growth is spawned from proper capital investment and expansion. This comes from a pooling of savings. Employing or raising Tariffs is no different that raising taxes. This action simply taxes the original factors of production: land, labor and capital. Since it shrinks the inventory, it "taxes" the business owner. The business owner can not pass the tariff forward to the consumer. The consumer, over time, will seek alternatives, forcing the business owner to lose revenue. 


This brief article only shows a small negative impact of tariffs. The impact can be wide ranging, as the total inventory of a good is based on the global supply. Tariffs simply shrink the overall global inventory of that good, this driving prices 

Friday, April 22, 2016

Some Odd Scholarhip by Ayn Rand

Ayn Rand had some strong positions against the points made by Immanuel Kant. Consider this excerpt:

"The “phenomenal” world, said Kant, is not real: reality, as perceived by man’s mind, is a distortion. The distorting mechanism is man’s conceptual faculty: man’s basic concepts (such as time, space, existence) are not derived from experience or reality, but come from an automatic system of filters in his consciousness (labeled “categories” and “forms of perception”) which impose their own design on his perception of the external world and make him incapable of perceiving it in any manner other than the one in which he does perceive it. This proves, said Kant, that man’s concepts are only a delusion, but a collective delusion which no one has the power to escape. Thus reason and science are “limited,” said Kant; they are valid only so long as they deal with this world, with a permanent, pre-determined collective delusion (and thus the criterion of reason’s validity was switched from the objective to the collective), but they are impotent to deal with the fundamental, metaphysical issues of existence, which belong to the “noumenal” world. The “noumenal” world is unknowable; it is the world of “real” reality, “superior” truth and “things in themselves” or “things as they are”—which means: things as they are not perceived by man."

This excerpt contains many misrepresentations of Kant's breakdown of the human mind, as Kant wrote in "The Critique of Pure Reason".  Kant argued that the human mind, specifically, the phenomena, must process concepts and precepts via The Concepts of The Understanding(12 of them) in the construct of Space and Time. The notions of Space and Time, are not things outside of us, but they are part of our intuition. When objects are presented outside of us, in them of themselves,  humans process these objects and they gain knowledge and understanding from their experiences. Those experiences are defined by Concepts, things that exist prior to our understanding of them via our senses, and our precepts, things that come from our experiences via our senses.

No where does Kant in his writings state that these concepts, as they are processed in our mind via Space and Time, are not "real". He argues that they are "real", as they are called phenomena. Phenomena are "tangible" objects in Space and Time, via our senses,  pushed through the concepts of the understanding, which allows our minds to gain knowledge.

The noumenal world is not a "separate" world per se. These are concepts that can not be placed in the phenomena world, things that are filtered via Space and Time. Yes, they are "things as they are", but they are much more abstract concepts: e.g Freedom, Soul, God, and the like. Can these concepts be processed via Space and Time, and projected into our minds? Answer: No.

In short, this is one example of Rand's mis representation of Kant's positions.

Tuesday, April 19, 2016

The 'Natural Interest Rate' Is Always Positive and Cannot Be Negative

The 'Natural Interest Rate' Is Always Positive and Cannot Be Negative:

Key Excerpt: "Some economists have been arguing that the “equilibrium real interest rate” (that is the “natural interest rate” or the “originary interest rate”) has become negative, as a “secular stagnation” has allegedly caused a “savings glut..."
The notion of a negative interest rate is against nature. The concept of interest rate is based on the human action of choice and preference, as the actor moves in space and time. For example, we choose things based on the preference of things that will provide us some sort of "pleasure". If a person chooses item (x) before item (z), this means that in that moment in time, item (x) is preferred over item (z).  This process happens in space and in time. Time has passed forward, as the actor moves from item (x) to item (z). The definition of the natural rate of interest is the price ratio of goods at two different points in time. Based on this definition, and the notion of time, and space, the natural rate of interest can not be negative. Also, we can not go backwards in time based on our actions. This notion makes the concept of negative interest rates fallacious.

Ayn Rand and Karl Marx: Guilty of Bad Scholarship

While Ayn Rand and Karl Marx provided seminal works that pushed intellectual scholarship forward these two respective thinkers are guilty of some bad scholarship. Quick thoughts on three things Karl Marx or Ayn Rand got incorrect:

1. Marx on Hegalian Dialectic-This was not central to G.W. F. Hegel's aesthetic writings. Hegel used it in his logical discourse, as it appeared natural in nature, however, it was not created to "control" or manipulate others.

2. Immanuel Kant-Rand claimed Kant was the "most evil man in history". One, that is false, simply because, well...I take that claim. Secondly, Kant's "Critique of of Pure Reason", or his "Prolegomena to Any Future Metaphysics", simply demonstrated how man is able to formulate and synthesize concepts in space and time, governed by certain universal laws or principles. He was NOT attempting to usurp reason. Not at all.  His treatise simply acted as a guide to "tighten up" or strengthen the process of our use of reason. It is a disservice to all scholars to accept this Argumentum ad Hominem pushed forward by Rand, and never investigate Kant's work on this subject. Many may take issue with Kant's analysis on Ethics, as that is quite fine.

3. Marx on Labor Theory of Value-Marx believed that Labor spawned the end value of a product. When a firm sold that product, the "profit" yielded was not "shared" with the workers. This is a false hood. The notion of value is subjective to the individual, as we have preferences of things we act upon. The work of Eugen Bohm Bawerk debunked this labor theory of value, in his work, "Marx and the Close of His System". It is a devastating blow to Marx's work in "Das Kapital"..

Ayn Rand has a cult-like following, as does Karl Marx. These incidents of bad scholarship does not mean that their overall work does not have any meaning, or make them less relevant.  It just means that the Kant and Hegel deserve deeper investigation. Also, the notion of the labor theory of value requires deeper critical epistemological analysis.

Contrary to White House Claim, Compensation Has Been in Line with Productivity | Mercatus

Contrary to White House Claim, Compensation Has Been in Line with Productivity | Mercatus

"The White House has been among those who believe in the productivity-pay gap claim that workers’ productivity rose at a high rate over the last four decades but growth in real earnings failed to keep pace and instead changed at a nearly flat rate (see the green line in the chart below). These arguments continue to fuel the debate on contested labor policies such as the overtime pay rule and minimum wage increases. A more careful and comprehensive analysis of real worker pay and productivity data, however, shows that worker compensation is closely tied to worker productivity. "

Thursday, April 14, 2016

We're Still Haunted by the Labor Theory of Value | Steven Horwitz

We're Still Haunted by the Labor Theory of Value | Steven Horwitz

Marx falsely believed that the end value of the product, was based on the cost of labor that went into the creation of this product. Adam Smith believed this, as this was a common theme for most classical economists. This was a misleading belief.

The Marginalists Thinkers, Carl Menger, Stanley Jevons, et al, discovered that value was subjective to the individual. Also, Eugen Bohm Bawerk introduced the inter-temporal notion of the natural rate of interest. This notion also helped debunk the labor theory of value in many academic circles.

One can still see this argument rear its head in many places in political and social discourse. However, it is still a falsehood, thanks to the work of the marginalist thinkers.

Wednesday, April 13, 2016

Who’s in Charge, Capitalists or Consumers? | Steven Horwitz

Who’s in Charge, Capitalists or Consumers? | Steven Horwitz


"Opponents of economic freedom have a twisted view of entrepreneurs, imagining them to be greedy exploiters of both workers and consumers. But advocates of free markets can have their own distorted ideas of entrepreneurship. Our vision is often a romantic one. We imagine the heroic businessperson who comes up with a new idea, device, or method; who persists against long odds to bring it to market; and who profits greatly when it revolutionizes an industry."

Monday, April 11, 2016

Three Lessons Learned from Tesla’s Success

Three Lessons Learned from Tesla’s Success:

Excerpt: "Last week, we saw some new threats emerge against the existing auto industry."

Note: I am not sure if pre-orders mean that something is "successful".

Thursday, April 7, 2016

Money Supply and the Velocity of Money

Money Supply and the Velocity of Money: The Mainstream View of Money Velocity is flawed. It compares the movement of money like movement of an object in the science of physics. All of it is based on the notion of the equation of exchange. Analysis of that equation and the notion of "The Velocity of money" will be covered at another time.

Wednesday, March 30, 2016

True Knowledge from A Priori Theory

True Knowledge from A Priori Theory:

How do we know about the outer world — or reality, for that matter? Where does our knowledge about it come from? The attempt to answer these questions leads to epistemology, the branch of philosophy dealing with the origin, scope, and validity of human knowledge.

A Priori Theory and Sound Money

A Priori Theory and Sound Money:

A priori theory shows us that deviating from the sound-money principle leads to disastrous economic, social, and political damage.

Mises, Kant, and Welfare Spending

Mises, Kant, and Welfare Spending:

From the context of natural rights, government has no justification in forcing you to pay for a charity you would not fund voluntarily.

Wednesday, March 23, 2016

Ancient Greece’s Legacy for Liberty: Economic Ideas in Aristophanes

Ancient Greece’s Legacy for Liberty: Economic Ideas in Aristophanes.

Key Excerpt:

"Aristophanes’ plays frequently explore interesting economic ideas.  Since he’s writing comedies. it’s often difficult to tell which ideas he’s endorsing and which ideas he’s satirizing (or even whether those two possibilities are mutually exclusive).  For example, his endorsement of free trade in the Acharnians certainly appears sincere;1 yet his Birds offers a sympathetic portrayal of a trade embargo (albeit a rather fanciful one: the birds of the sky interfering in commerce between human beings and the gods).  All the same, the economic proposals he discusses are worth our attention regardless of what attitude he himself may have taken to them."

Tuesday, March 22, 2016

February Austrian Money Metric: Money Supply Growth Falls to Four-Month Low

February Austrian Money Metric: Money Supply Growth Falls to Four-Month Low: The 'true money supply' measure is a measure of the money supply pioneered by Murray Rothbard and Joseph Salerno and is designed to provide a better measure than M2.

Sunday, March 13, 2016

More Thoughts on Interest Rate

The Interest Rate: The mystery. The intrigue. Most individuals concern themselves about this when they are purchasing a home loan, acquiring credit cards, or purchasing a new vehicle. However, this notion is much broader than obtaining more debt. It is much broader, yes, much deeper than imagined, as is not well understood, even by philosophers, economists and finance scholars. The natural rate of interest, or ordinary interest, is inherent in every thing we do as actors in a "free market" economy.

What is the Natural Rate of Interest?

Classical Economic Model

There are two divergent models of analyzing the notion of natural rate of interest. The first model is derived from the Classical Economic school of thought.  This model is based on the popular Economic frame work of supply and demand. Simply put: The interplay of the supply and demand of money, produces a particular interest rate.(Ceteris paribus)  For example, if demand is held constant, and the central bank increases the monetary base, the interest rate would fall. Conversely, if the Central bank decided to reduce the money supply, with demand remaining constant, the interest rate would rise (Ceteris paribus) If this is analyzed from the demand side, if demand rises for the currency, and the currency bases remains the same, the interest rate rises.(Ceteris paribus). If the demand for the currency falls, and the currency base remains the same, the interest rate will fall.(Ceteris paribus) This Classical model of analyzing the interest rate views things at a macroeconomic level.

Marginalist Economic Model

This model was specifically pushed forward by Marginalist Economist, Eugen Bohm Bawerk. As per Bohm-Bawerk et al, the notion of the natural rate of interest speaks to the time preference of consumption from the individual actor in the marketplace. To Wit: The time preference of from the individual's consumption between today's goods, as compared to future goods. Notice that this definition has little to do with the bank's rate of interest, although the bank's rate is a singular actor's rate of time preference, as that actor would be the bank. This ratio, nets the prices between the two respective time periods. Of course, this activity is not a static, so the interest rate is constantly shifting, modulating and changing, as the actor's preferences change.

Interplay of Interest Rates to Meet Equilibrium

Going back to the Financial Intermediaries, e.g Banks, Credit Unions, Financial Institutions, Insurance companies, and etc.) need to manage cash and their monetary equivalents, these institutions' role in the market economy is vital. They are responsible for allocating scarce resources, to wit, providing cash capital to entrepreneurs. Many people mistakenly assume the bank's interest rate is the same as the natural rate of interest, as this is demonstratively false.

Let us suppose that the bank's interest rate is 5%, and the natural rate of interest, in the marketplace, was 8%. The bank would loan out, or invest, or place money in capital goods that would yield a 8% return. This process would continue until the bank's interest rate matched the return on those capital goods. Why does this happen? As the bank continues to invest or loan out money into those capital goods, the demand for those monies and goods rise. As the money demand rises, due to the need to invest in capital goods, the bank's price on money, the interest rate, rises. Once the bank's interest rate, and the return on investment in capital goods equals the same rate, it makes no sense for the bank to move money into those capital goods.

What happens if the natural rate is below the bank's interest rate? If the bank interest rate is 5%, and the natural interest rate is 3%, the bank will not seek to loan or invest into capital goods at that lower rate. What may occur is the following: Banks may continue to hold the cash, at 5%, until the demand for long term capital projects rise above 5%. In this case, as in the prior case, the opportunity cost of the bank's money must be considered.

Banks are seeking to profit from the arbitrage: In the former case, the Bank seeks to make a profit from the spread of 8%, the natural rate, and the 5%, the bank rate. As for in the latter case, the bank seeks to take a more conservative position and hold onto its cash. In both cases, on the long run, all actions will seek to meet equilibrium.

Based on these two examples, the bank's interest rate will not equal the natural rate of interest. This is true since there would be no profit seeking opportunities. The bank's funds would sit idle, no cash capital would move other sorts of capital markets. This sort of analysis demonstrates that these two interest rates are not the same.

An Example of the Use of Interest Rates in the "Real World"

With a business that is capital intensive, management of this capital equipment is vital for the success. When a business owner is seeking more cash capital to acquire a piece of capital equipment, he should be factoring how this equipment can benefit his operation, on the margin. He will look at how the marginal cost impacts the marginal benefit. If the firm has extra cash, or investment capital, it will seek to obtain a return on investment on that capital. So, if the owner of the firm is purchasing a piece of manufacturing equipment, and will yield a return on investment higher than the natural rate of interest, and the current "bank interest rate", the business owner will invest in that manufacturing equipment. The owner, like all humans, is engaged in a profit seeking enterprise. And, it is that profit that is his return on investment.


As with all things, in the capital markets, actors are constantly pushing towards equilibrium. All actors are seeking a state of peace, or in economic terms, equilibrium. The constant ebb and flow of the play between the natural rate of interest, and the interest rate placed by financial intermediaries demonstrates this. The natural rate of interest simply is an expression of human action, as the individual's preferences span throughout the space/time continuum. 

Tuesday, March 8, 2016

National Sales Tax: Is it a good Idea?

"Which is better: The National Sales tax, or the Flat Income Tax, Robert?"

I am asked this question constantly. Many folks that push for a "Fair tax", or National Sales tax, are under the illusion that this sort of tax is better, as it will rid us of the IRS. I am under no such quixotic vision of the future, as the special interest groups are well vested in having a tax system.

My reply, regarding the "Fair Tax" or VAT, technically they both are similar, will be stated in the words of Murray Rothbard, Phd. See the link to the article below.

The Value-Added Tax Is Not the Answer: The VAT allows the government to extract many more funds from the public — to bring about higher prices, lower production, and lower incomes — and yet totally escape the blame, which can easily be loaded on business, unions, or the consumer.

Negative Rates May Be Ineffective and Dangerous

Negative Rates May Be Ineffective and Dangerous: ... according to the Bank for International Settlements (BIS) — the so-called central banks' central bank.

Here is my commentary on the concept of Negative Interest Rates:

The notion of a Negative Rate of interest, is risible at most. According to the pure definition of interest, the interest rate is defined as the price ratio between the following: Present goods vs Future Goods.  To wit: This helps define the inter-temporal time preference of the actors in the market place. This is the definition, as per the work of Marginalist thinkers of Economics.

If one were to consider the Classical economic model of interest, it is defined as the equilibrium price between the supply of money(currency) in circulation, against the demand of that money. In this model, the interest rate acts as a "price".

In either model, the question remains: How is it possible to have a negative interest rate? If one considers the former model, how is it possible to have a negative interest rate? Does one prefer items prior to their creation? Does one go backwards in time to prefer and obtain items? Or, if one reviews this notion of negative interest rate using the classical economic model, how does one determine a negative "price" of money?

Tuesday, March 1, 2016

How Sweet It Is! The Maple Syrup Cartel Crumbles

How Sweet It Is! The Maple Syrup Cartel Crumbles: Economists have long argued that irresistible market forces will crush a cartel that inefficiently restricts supply and raises the price of a product.

This article is proof, that over time, cartels can be eroded. The economic notion of elasticity of demand will always rule. Customers will, if given alternatives, exercise those alternatives, relative to how the value those things they have during their utility seeking process. In English: People, during their pursuit of happiness, will acquire the things that provide them the best value.

When value equals and exceeds price, an exchange takes place. If the value begins to drop below the price, people will seek out alternatives. Recall that value is subjective to each person.



Friday, February 26, 2016

Fired? Dont Leave Any Money Behind

You lost your job. Life can send us curve balls at times. However, we can still recover. During the recovery process, while you are looking for another job, do not forget about your money. Many think that leaving the money in the prior job 401k(or similar plan) after being fired, is the prudent thing to do. Nothing can be further from the truth. Who is better at managing your hard earned cash? You? or your prior employer...the one who just fired you?

Moving Money from the 401k to a Traditional IRA

It is a simple process to move those monies, tax free is an added benefit, from your old employer's 401k(or similar plan) to your personal retirement account. The simplest way is to transfer those funds, is to transfer them to a traditional IRA. This account functions, with regards to taxation purposes, just like the 401k type plans--making the transfer is quite simple, and it is easy to complete. Since the IRA is only the qualified tax plan, however, there are a variety of financial services tools that can be used inside the IRA to build monies for retirement.

Moving Money from the 401k to a Roth IRA(Or similar Plan)

Suppose you want to transfer the monies to a Roth IRA? Or, you are seeking to be more creative, and you wish to transfer the monies to another sort of retirement vehicle? This will trigger a taxable event, as the Roth IRA does not function like a Traditional IRA, or a 401k plan. With a Roth IRA, taxes are paid on the monies prior to the contribution to the IRA, yet at the time of the withdrawal of those monies, at retirement, the funds are not taxed. 401k type plans work in the inverse: The contribution into the plan receives a tax benefit, but the withdrawal monies, at retirement, are taxed as earned income.  This can be done, just realize there is a taxable consequence to consider. Just like the traditional IRA, there exists many different financial services tools to use inside the Roth IRA to help accumulate wealth for retirement.


Losing a job can be a downer. However, do not leave your retirement monies with your old employer's 401k plan. It is a painless process to move those monies out of that plan, into a plan that you control. Move those monies, and then focus on getting another job. When you decide to move your monies, always develop a financial plan to follow to ensure that you meet your financial goals.

Thursday, February 25, 2016

More Thoughts on Free Trade

Free Trade: The process that benefits us all. Many political knaves rant and rave about having trade deficits with other nations. They speak of the "trade imbalance", and something must be done to "protect American" interest. To those who are not steeped in the understanding of economics, this argument, prima facie, seems plausible. However, this polemic, quite frankly, is balderdash. The ones, who seek to intervene in the process known as Free Trade, simply lack the economic understanding of some fundamentals.

Trade takes place with individuals, with not Nations

When one purchases an item from the store, that product may have been made in China, Mexico, Vietnam or some other country outside of the U.S.  However, that product was sold by an individual, not a nation. That "individual" maybe a corporate entity, but the fact still remains the "nation" did not "sell" this product. Once one begins employing economic analysis, with the notion that we trade with nations, it becomes quite apparent this position is false and misleading. Individuals purchase products based upon their desire to pursue their individual objectives. Private firms go into business to earn a profit. This profit is used to expand the enterprise, pay back investors, etc. etc. Customers purchase these goods to benefit their well-being.

Trade Deficit is Hogwash

This fallacious notion of a "Trade deficit" is as old as the hills. The entire notion of mercantilism embraced by the elites believed a nation's wealth was based on the amount of Gold it held. If there was a imbalance of trade with respect to Gold, typically this imbalanced was made "balanced" by employing some sort of tax or tariff on foreign goods. Many of the classical economists, such as Adam Smith, David Ricardo, David Hume and others, argued vehemently against mercantilism, as they believed it was detrimental to the citizens of the "mother" country.  Fast forward to the 21st Century, mercantilism still is alive and well. Modern believers in mercantilism want to "punish" China, for example, for selling their goods at a lower price. Using their logic, American consumers should pay higher prices for goods. These modern acolytes of the mercantilism cult do not say this explicitly, however, their desire to have tariffs demonstrate that these folks want that objective.  The use of tariffs simply restrict the inventory of that said good in the marketplace, and with the same level of demand, prices will rise.

With respect to the notion of a trade deficit, this myth has been addressed on this blog ad nauseam. Let us take the example of China. Many Presidential candidates, specifically Donald Trump, claim that China has an imbalance of trade with the United States. If trade is simply measured on the same goods that are sold to the buyer, and if the seller buys those same goods from the buyer, then there will be a trade imbalance. Simply put: I purchase bananas from my grocery store. Yet, my local grocery store does not purchase bananas from me. Thus, there is a trade imbalance, in terms of bananas.  However, the dollars, which act as a measure of accounting, demonstrate that there is no trade imbalance. If you pay $1.00 for bananas, the store receives the $1.00, you receive the bananas. It all balances out using regular bookkeeping logic. Also consider this:  Both parties value their items differently. The Store values the dollars more than the bananas, and the buyer values the bananas more than the dollars. Both parties win. While this seems to be a simplistic example, this holds true at the macro level. Chinese firms sell their goods or services, and in exchange, we give those firms our US dollars. The Chinese firms can re-invest those dollars and expand their enterprise; this benefits them in the present and the long run. The US Consumer has the pleasure of obtaining a product to enjoy.  In the notion of free trade, both parties benefit.

Trade deficit between States in the United States?

Since these politicians seek to speak ill of the "trade deficit" between China and the United States, why not complain about the trade deficit between States? Or between counties? Or between Cities? Is it right to argue that Nevada has a "trade deficit" with regards to Gambling, as compared to Utah? Is it wrong to argue that Idaho has a trade imbalance with regards to potatoes compared to Texas?  No one would argue for such foolishness. Yet, this argument is equally as risible as arguing about the trade imbalance between China and the US, or the US and any other nation.


Having a trade deficit with China, or any other nation, is simply a mythology. We have a trade deficit with our local grocery store, Gas station, Electronics Store, and the like, since none of those stores buy from us those exact same goods. Yet, in exchange, they take our dollars for those goods. This eliminates the "deficit". Also, we never hear about a deficit between states, or cities, or counties. This sort of speak is simply reserved for histrionic talk to get voters emotionally engaged to a particular candidate.

Tuesday, February 23, 2016

The Un equality of Free Trade

The current crop of political candidates are lamenting on the trade imbalance. For example, the United States, as per the political candidates, has a trade imbalance with China and other nations. Is this an accurate assessment?  How can a trade between two parties be imbalanced?

Free Trade is always imbalanced

With Trade, it is an imbalanced transaction. For example, if two parties are engaged in a trade, let us state it is for eggs from a grocery store, the grocery store owner values the eggs less than the dollars given to them by the customers. The dollars hold a higher value than the eggs, if the eggs held a higher value, they would not be sold for that said price for those dollars. Conversely, with the customer, the customer values the eggs more than the dollars given to the store owner.

Trade Deficit

When politicians scream about the "Balance of trade", this is a false claim. It is based in the old mercantilism argument that trade must be "balanced", and if not, dire economic consequence must follow. I have shown, on this web site,  with this article, that this matter is of no concern. Both sides benefit from the trade, yet both sides value their respective trade items differently. However, from an accounting point of view, the trade is balanced.

Why is this myth still around?

There is a variety of reasons this myth still exists. However, the primary reason is the following: Many politicians view themselves as a dues ex machina with the citizens. When unemployment hits hard with some citizens, these citizens lose their jobs, or the company goes bankrupt--they are searching for reasons to explain their loss. Enter the politician: He comes in with a cacophony clarion call to appeal to these lost souls. His reasoning is rooted in a xenophobic message, while simultaneously saying that "I can make America great again!". These message resonates deeply with these individuals, creating an emotional connection. Once this politician is elected, and he implements higher tariffs, price controls, and the like, for example, it simply makes matters worse.

Retirement Planning with the S&P 500 Index

Many investors use the S&P 500 as a means to invest their retirement funds. There are financial services products that can be used for retirement, that utilize the S&P 500 as a means to grow retirement funds.

The new growing trend: People utilize Fixed Life insurance contracts to accumulate wealth. These contracts allow one to have their cash value receive "credits" based on the performance of the S&P 500. Another point: If the S&P 500 loses money, the insurance company still guarantees no loss of the principle.(cash value).

Call me directly to see how this product can help you obtain your financial objectives.

Here is a graph of the performance of the S&P 500:

Sunday, February 21, 2016

Retirement Planning for You, and not your Uncle Sam

A fellow Slide Share member posted up this presentation regarding planning for retirement. The provides an excellent way of dealing with the issues surrounding building wealth for your retirement years, and how to maintain that wealth while living during those golden years.



Saturday, February 20, 2016

The Daily Wonky Graph: GDP Trend Since 2008

The graphical trend of GDP since 2008. While it has improved since 2008, the economy is still somewhat stagnant, as per this graphical display. Of course, other items must be analyzed while looking at economic growth. Recall: GDP is the final numbers, not the purchases of the intermediate goods for the production process.

With Gross Output of all industries, it shows intermediate goods purchases, some that are included in the GDP number. These purchases are typically purchase of goods or inputs prior to the final sale of the products. The GDP number reflects the final sale, the GO numbers, for the most part, are pre sale to consumers.

The Bizarre World of Negative Interest Rates

A fantastic interview titled:

Paul-Martin Foss: The Bizarre World of Negative Interest Rates:

The concept of negative interest rates, already adopted in Japan, is now under serious consideration in Europe and the US. Here to make sense of this bizarre environment is Paul-Martin Foss, head of the Carl Menger Center and a regular contributor to

Wednesday, February 17, 2016

Random Thoughts: Macroeconomic Concerns

Currently, investors are in a quandary on where to invest their money.  So many experts are providing a farrago of ideas to invest their money, as this creates even more uncertainty with most investors. This creates an austere position with investors and their cash. While all of these maybe viable options, there are some macroeconomic concerns that need strong consideration before doing any sort investing.

Is there another Market Correction imminent? 

Many experts feel another “bear” market coming along. They feel this many reasons, but I will limit it to simply a couple reasons in this article.  First of all, the yield curve between short term Government debt and long term Government debt is shrinking. As per the Expectation Theory, any time the yield curve begins to “invert”, this means that a market correction is near.

The Fed’s Monetary policy 

Up until recently, the fed has kept interest rates historically low. Based on the Fed’s logic, this is to help stimulate the economy. The Fed has also performed other sorts of strategies to help jump start the economy, as Operation Twist is an example of this. In short, Operation Twist purchased Government debt, over time starting in 2008. Now, there is a large amount of Government debt residing on the Fed’s balance sheet. What is the exit strategy? How will these bonds get unloaded? If the Fed continues to raise interest rates, how does this alter the exit strategy? Currently, by expanding the money supply, this impacts retirees, as this is a recipe for inflation. The United States has a large number of baby boomers reaching retirement age. How this plays out is very uncertain.

The Presidential and Congressional Races 

With the Presidential and Congressional races upcoming, fiscal policy will be altered.  How will taxes play a role with the new President and new members in Congress? If taxes are raised on the “rich”, this will impact the economy. Typically, the “rich” are individuals who still trade time for dollars. In this case, this will also include retiring baby boomers. Another consideration: Obama care. How will the economic costs play out for this program?


These are just some random thoughts as we progress through 2016. If you are not reviewing your economic plan, start this process immediately.  Contact us to see how you can properly navigate through the tempest of marco economic concerns.  Your financial plan can be a bulwark against these financial storms.

Sunday, February 14, 2016

The ideal man: Ayn Rand interviewed by James Day

The Federal Reserve and Other Retirement Risks

The Federal Reserve’s growing balance sheet is a major concern for professional investors. However, it should be a growing concern for main stream investors, and it should be a concern for folks looking at retirement in the near future. Why should this be a concern for individuals attempting to accumulate wealth for retirement, and seeking to use their retirement funds to enjoy the golden years? What other concerns should individuals have while planning for retirement?


The Federal Reserve’s balance sheet has grown since the Great Recession of 2008. The Federal Reserve began purchasing US Government Debt instruments via programs such as Operation Twist. When the Fed purchases Government debt (Bonds), it does not purchase them directly; it purchases them via a 3rd party dealer. This purchase, in turn, increases the money supply.  The Fed creates the cash, from a computer entry, and the purchase occurs. Due to the rules of the fractional banking system, the money supply is increased once that purchase check is deposited.

Here is an example a chart here showing the growth of the Federal Reserve’s balance sheet:

Eventually, the Federal Reserve must have an exit strategy to deal with this debt from the growing balance sheet. What is the strategy? Raising interest rates? Selling off the debt? What is it?

Inflation Concerns

Recall, for readers who frequent this blog, the definition of inflation: It is the increase of the monetary stock or base.  The monetary base is increased, as the Fed continues to purchase more US Government Debt.  Inflation impacts individuals that are on fixed incomes, which are typically retirees.  As the monetary base is debased, the ability for retirees to spend dollars on goods and services alters dramatically.  This means that retirees must have the ability to have their investment dollars outpace inflation.

Analysts love to cite the CPI as a measure of inflation; however, this is not an accurate measure of inflation. Looking at various factors, such as commodity prices, is one way of looking at inflation. Food prices should be analyzed as well, with regards to looking at inflation. While food prices, as well as commodity prices have dropped considerably since 2008, they are still higher than they were 10 years ago.

Graph of Food Prices:

Graph of Commodity Prices:

Individual Savings Rate

Currently, the individual savings rate is around 5.5%, as of December 2015. Since the 1950s, the individual savings rate has shown a downward trend. This is an interesting trend.  From an economics perspective, savings is needed to expand the economy and spur economic growth.  If the savings rate is down, this could be a harbinger for things to come.  As a retiree, one must review their stocks accordingly. Should my equities include companies that are seeking to expand? Can they expand if there is a declining savings rate? If this is the trend, how should one manage their portfolio?

A graphical display showing the trend of the individual savings rate:


Currently, the marginal income tax rates are the lowest in decades. With the United States Government debt load reaching its zenith, and the demand of the use of Social security, Medicare, Obamacare, and the like, politicians will seek to raise tax rates.  In fact, some of the leading presidential candidates are proposing to raise taxes on the “rich”. For example, Donald Trump says the following:
“If you look at actually raise, some very wealthy are going to be raised. Some people that are getting unfair deductions are going to be raised. But overall it’s going to be a tremendous incentive to grow the economy and we’re going to take in the same or more money. And I think we’re going to have something that’s going to be spectacular.” (Nolte, 2015)
Presidential Candidate Bernie Sanders is pushing the following:

“Mr. Sanders has proposed a headline top tax rate of 52 percent, applying only to incomes over $10 million. But that’s just the federal income tax. When you combine it with other taxes that apply to income, like existing payroll taxes and new ones Mr. Sanders would impose to pay for Social Security, single-payer health care and family leave, and then add those on top of taxes levied by state governments, it would add up to a combined tax rate of over 73 percent on the highest incomes, more than 20 points higher than today. That’s in the average state — maximum rates in high-tax jurisdictions like California and New York City would be even higher.” (Barro, 2016)

One should consider that all sorts of tax increases could occur; this is to include an increase with Estate Taxes.  No one knows for sure if this will happen, however, there needs to be a plan in place to deal with this tax risk.


Saving retirement in this economic climate will be a challenge. All of these aforementioned items must be considered while designing a plan for retirement. These risks are real concerns, and building an solution to protect and grow your hard earned cash should be the objective. This can be done, as there are solutions to mitigate these risks. If you are at retirement age, these things, and many other items, should concern you. Attempting to mitigate your tax liability, while at retirement, should be one of the top priorities in dealing with your economic plan. Ideally, having a Tax Free retirement should be the objective.

Works Cited

Barro, J. (2016, Febuary 9). Bernie Sanders' Plan Would Test an Economic Hypothesis. New York Times.
Nolte, J. (2015, September 28). Trump Pushes Single Payer Healthcare, Tax Increases on the Wealthy. Breitbart.

Saturday, February 13, 2016

The Single Biggest Benefit in the Federal Tax Code?

Ed Slot, the famous Tax Advisor, opines on the benefits of using the single biggest benefit in the Federal Income Tax code. This benefit is:

"And as a tax advisor, I can tell you that the single biggest benefit in the federal tax code is the income tax exemption for life insurance." ~Ed Slott

Most people focus on the income tax free death benefit that life insurance provide. However, there are many other benefits that Life insurance can provide, while one is alive.

Tax Benefit

Life Insurance can provide a means to build wealth tax deferred. Similar to a 401k or an IRA, a permanent life insurance contract grows the cash value tax deferred. However, the IRS does not provide restrictions on when these funds can be withdrawn. Also, at retirement, the funds can be accessed income tax free.

Life Insurance Costs are really paid by...Uncle Sam? 

As the cash value grows, the true amount that is being insured by the insurance company is the net difference between the total cash value and the face amount. As previously stated, the cash value is growing tax free, thus the insurance costs are being covered by the IRS. This is a win-win for those utilizing this wealth building strategy.


With Life insurance, the owner of the policy has more control. Compare this to a typical retirement account(e.g 401 k, IRA, and the like), there are more restrictions and penalties with regards to accessing the monies in these account. With life insurance, one can withdraw monies, in many cases, without penalties, at any time. This assumes, of course, the monies are available. The over all point still holds: The owner has more control over his hard earned cash.


Life Insurance, with the use of leverage, allows one of the best vehicles to build wealth over the long haul. One dollar in a life insurance policy can do multiple things: It can work as a cash accumulator, it has a death benefit pay out, it can pay out long term care benefits, it can grow tax free, the death benefit is passed down tax free, and on and on. All with simply the same dollars placed into the policy. Whereas with an IRA or 401k type account, it does not have multiple uses with that same dollar.


Having a solid life insurance program is a vital cornerstone in anyone's wealth building program. With these benefits, and many more, a solid life insurance policy can turbo charge one's wealth. It is typically overlooked, but it should be taken more seriously when placing together a financial plan.

Friday, February 12, 2016

More on Negative Interest Rates

It seems the Central Bank in the Euro Zone is continuing to embrace the notion of negative interest rates. The notion of the natural rate of interest is based in the individual's time preference of their utility ranking. In English, this simply means that all of us rank things that we are going to consume from lowest to highest. Of course, since we are limited to only 24 hours in a day, many of those preferences must be done in the future. That is the foundation of interest: The net between things consumed in the future, as compared to those things consumed in the present.

This notion is the foundation of many theories in finance and business.  The notion of interest helps price out long term loans, debt, and large long term capital projects, just for starters. Business owners need to have the ability to price things, in the present, in the terms of future prices. They can adjust these present prices in the terms of the future based on a calculation using the interest rate.

You maybe asking yourself, "How does the notion of negative interest rates fit into this definition?" Answer: It does not. It is against nature. Yet, these central bankers will continue to push for "negative" interest rates simply to stimulate the economy. Think of it this way: The lower the central bank pushes a form of price control by using negative interest rates, this will encourage more consumption, in the present. Long term capital projects will not happen, shorter term projects will take place. Savings and hoarding become extinct. Without proper savings, the economy can not expand and grow organically. This will lead to many asset bubbles, market swings, and crashes.

Of course, this impacts the Euro, as it will debase the Euro. All of this makes the Dollar, and commodities, look sweeter for folks who have the euro.

Read more of the ECB's exploration in Negative Interest Rates here: 

Tuesday, February 9, 2016

Questions Regarding Inflation

Many folks have concerns about inflation and deflation. Addressed below are questions submitted by the vox populi regarding this topic. Before addressing the questions, the definition of inflation and deflation must be addressed.

Definition of Inflation

Inflation is the increase of the monetary base. If the central bank decides to increase the money supply, this is inflation.

Who is negatively impacted greatly by inflation?

When inflation occurs, it increases the monetary base. Once the monetary base has increased, it makes the next monetary base unit less "valuable", on the margin. The net result is that the currency because weaker, it it loses its ability to store value for consumers. Individuals who are are on a fixed income, such as retirees, savers, and the like are impacted greatly by inflation. Individuals who are creditors are impacted by inflation as well. Why is this the case? When someone creates a debt, it is based on today's dollars, but the interest rate helps adjust the total amount paid to future dollars. If inflation occurs, the interest rate on the debt is fixed, it does not adjust to the increase in the money supply. So, those future dollars maybe less valuable if there is inflation, and the interest rate on the debt does not account for this.

How Savers are impacted by Inflation

The act of savings is deferred consumption for the future. For example, one may save up to purchase a house in the future, utilizing the savings as a down payment. The saver is placing faith that the monetary base, in most cases the currency, holds the value during the time the person is saving up to purchase the item. When inflation occurs, the value is eroded,

How to protect yourself from Inflation

There are various strategies to mitigate against the risk of inflation. Some advisers suggest purchasing Gold, Silver or other commodities to hedge against inflation. Many also invest into equities, as this can be a way to deal with inflation. Others may look into Real Estate investing, as this is a popular method to deal with an increasing currency supply. While all of these methods, and many others, are appealing, they have their own risks. The main takeaway is to make sure one is educated on how to invest into these various investment classes.

Sunday, February 7, 2016

Trade Deficit: The Economic BoogieMan

The Trade Deficit, according to the politicians, needs to be handled. It is the inhibitor of the growth of the United States economy. Many claim that, for example, that China has a trade imbalance with the United States, and this imbalance is impacting our economic growth. While this makes for grand kabuki theater, this sort of statement does not pass the economic sniff test. In reality, free trade benefits both parties engaged in the trade.

Marginal Utility 

The purpose of individuals participating in trade is to improve the situation of the two parties in the respective trade process. In economics, this is called "utility seeking" behavior. During the process of a trade, both parties are giving up something that has a lower value, or lower utility, to obtain something that has a higher value(utility). Of course, this means the trade is unequal, due to the fact that value rankings are subjective to each individual. For example, if someone is purchasing a meal, that customer prefers the meal over the dollars for that meal. Also, they prefer what other things they could purchase with those same dollars, at that time. On the other side of the transaction, the business owner selling the meal prefers the dollars from the customer over the meal being sold. The business owner seeks to use the dollars from the sale to do other things. 

Accounting Analysis

In this transaction with the meal and the customer, the notion of a trade deficit can be analyzed using accounting or bookkeeping methods. On the customer side, the transaction is as follows: 

Cash $7 Credit
Food Expense $7 Debt

As a blind person can see, this transaction balances. It meets GAAP standards, and it makes sense. Now, let us look at the transaction for the side of the merchant:

Food Revenue $7 Credit
Cash $7 Debt

This transaction is balanced too. There is no "deficit" or "imbalance" of trade. Of course, if one measures how much food is sold, comparing the store's sales of food to the customer's sales of food, there will  be a deficit. This is the same type of reasoning that the politicians use when using scare tactics regarding the trade deficit.

Tuesday, February 2, 2016

Bernie Sanders Social Security Proposal: Raise Taxes

Key Excerpt from the article, "Sanders bids for Older Voters Emphasizing Social Security Plan":

"Sanders wants to keep the cap on taxable income for Social Security at the current $118,500 a year for those earning up to $250,000 annually, and apply the levy on all earnings above that amount. It would mean the top wage earners would pay more to extend the solvency of the program and expand benefits by $1,300 a year for people making less than $16,000, he said."

Monday, February 1, 2016

How the Blockchain and Gold Can Work Together

How the Blockchain and Gold Can Work Together: A look into monetary history shows that people, when given freedom of choice, opted for precious metals as money. This doesn’t come as a surprise.

Key Excerpt:

"Fiat money has serious economic and ethical drawbacks, though. It is chronically inflationary, widens the gap between poor and rich, triggers boom-and-bust cycles, and compounds the economy’s debt burden. "

Wednesday, January 20, 2016

Chinese Currency Manipulation and Price Controls

The curious claim made against the Chinese about "Currency Manipulation" is gaining momentum. Many believe that the United States are "losers" in trade relations with China.  Somehow these modern day mercantilists believe that this impacts the trade deficit with China. In reality, the United States benefits from China's "currency manipulation", at the expense of the Chinese citizens. To have a deeper understanding why this is true, "currency" must be analyzed as a good, and the Chinese government, in effect, is placing price controls on its currency. When analyzed under this light, the outcome is pretty clear: the Tax Payer class in China pays the economic cost of this action.

Economic Theoretical Considerations of Price Controls

In economics, there are two types of price controls. The first type is where the Government places a price maximum on a particular good or service. When this happens, the price maximum is above the equilibrium price. Based on the law of demand, the stock of the goods will increase, thus creating a surplus of that particular good. An example of this is the "ghost" cities in China. There are many buildings that are empty because the prices of those buildings are above the equilibrium price. The second type of price control is where the Government places a price minimum on a particular good. In the event of having the Government implements a price control that is below the equilibrium price, a shortage occurs. An example of this situation is the long gas lines that occurred during the 1970s when the Government implemented price controls.

Currency Manipulation is a form of Price Control

To move forward in this analysis, one must look the currency as a "good". Looking back at the claim that China is manipulating its currency, let us look at the ways that this falls under the two forms of price controls, as mentioned previously. When the Central Bank decides to increase the money supply, based on the Central Bank's estimates, and not what the market demands, it is placing a price maximum on the currency. This creates a surplus of currency in circulation. On the other hand, if the Central Bank decides to remove currency out of the circulation, but not based on what the market demands, it is creating a price minimum on the currency.

The Case with China 

The Chinese currency, relative to the US dollar, in this exchange, is a victim of price controls. There is an exchange ratio between the US Dollar and the Chinese Yuan. That ratio is "fixed"(sort of). When the Chinese central bank increases the Yuan supply, it creates a surplus of Yuan in circulation. Since there is an increase of Yuan in circulation, this devalues the Yuan, in terms of the US Dollar. Since the US Dollar is not commonly used by the vast majority of the Chinese citizens, and those citizens use Yuan to purchase goods and services, the Chinese citizens pay the price for the increase in the money supply. This is inflation. The Chinese citizens will see the prices, as expressed in Yuan, increase. This also usurps their savings, and it impacts citizens that are on fixed incomes. The goods they normally purchase take more Yuan to purchase, yet the dollar becomes stronger, relative to the Yuan.

Who Benefits from Chinese Currency Manipulation? 

It is obvious that the Chinese citizens are not benefiting from currency price fixing. The savers lose out, and the folks on fixed income also lose too. But, the folks who can hold US Dollars are "winners" in this scenario. Why is this true? Since the Yuan is being held to a price maximum, and a surplus is created, this drives down the value of the currency. Yet, assuming the US Dollar stays constant, this raises the value of the Dollar, relative to the Yuan.  The holders of the US Dollar, who live in China, they all benefit greater than the other residents who use Yuan.


This dynamic is simply an expression of Gresham's Law. The higher valued currency, drives out the lower valued currency, albeit in a "black market".  In this case, the US Dollar and Gold are held by a minority of individuals, political class and the tax consumer class--and the Chinese Tax Payer is using the devalued Yuan to use to purchase goods and services. This entire scheme is all set up by the Chinese central bank and Chinese government.

Repairing 'Mens Rea' Requirements by Robert Alt

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The Rise of the Fourth Branch of Government by Johnathan Turley

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Judge Andrew P. Napolitano: Natural Law vs. Tyranny

The Luxury Tax: A Folly of The Consumption Tax


Many politicians and lay persons believe the urban myth that Economics is a quantitative science, and that static analysis works with the interaction of human beings.  Politicians believe this when creating tax policy to generate revenues for the Government. These politicians sell the citizens that “taxing the rich” will increase revenue, or the implementation of a consumption/sales tax can simply be passed on to the consumer. All of these points are remarkably false.  All the costs of a consumption tax go back to the business owner, as it impacts the original factors of production: Labor, land and capital.   A glorious example of how this is proven to be true can be found in the famous Luxury Tax of 1990.

The Promise of the Luxury Tax of 1990

This tax was one part of a larger bill named: “The Revenue Reconciliation Act of 1990”.  This bill was created to generate over $140 Billion over a five year period. (Woof, 1991). For this analysis, we will simply focus on the maritime industry and the impact the firms in this market segment due to the implementation of this law. Specific to the maritime industry, any boat sales exceeding $100,000, there was a consumption (excise) tax levied.  The assumption was that consumers of yachts would absorb the increase price, as the other assumption was that the tax would be simply be passed on to consumers, and the Government would receive their projected revenues. However, this was not the case.

The Economic Impact of the Luxury Tax of 1990

The results of the implementation were not surprising for those who understand economics. First of all, the division of labor was impacted.  George Will remarks on the job losses due to this bill: “According to a study done for the Joint Economic Committee, the tax destroyed 330 jobs in jewelry manufacturing, 1,470 in the aircraft industry and 7,600 in the boating industry.” (Will, 1999)  In the State of Florida, the luxury tax impacted the layoff of approximately 13,000 workers. (Pin, 2011) This shows how the consumption tax impacts the division of labor, as it is one of the original factors of production.  Next, the businesses took a huge hit due to this tax. The Wall Street Journal notes here the following: “Yacht retailers reported a 77% drop in sales..” (Wall Street Journal, 2003)  Since sales drops, this reduces the amount of capital that business owners can purchase, borrow and pay back. The end result with this example:  Capital is impacted. What about land? How is this impacted? One can deduce that if sales are impacted, revenues are not able to keep up with the expenses.  Many of the boat manufacturers shut down their plants, and/or filed for bankruptcy protection from their creditors. (Salpukas, 1992) This would impact the land, since the boating manufacturing plants were closed down.

Economics is about Subjective Value

Many think Economics is about stats, graphs, charts and the like. While these items play a vital role in the historical analysis of human behavior, it does not tell the entire story.  Our individual preferences, as humans, are highly subjective. This sort of subjectivity cannot be accurately quantified, nor is the analysis static.  This is the fundamental reason why these sorts of Central Planning projects always fail.  It assumes that humans do not seek alternative choices when the costs to obtain a good change or rise.  Rising prices act as a harbinger for consumers, so they can alter their ordinal goods/services preference ranking. If someone prefers eggs over toast, yet the price of eggs rises exponentially, this does not mean the consumer will continue to purchase eggs. The consumer’s resources are scarce as well, even if they are “rich”. They have other items they prefer, and may choose to plow resources into those items when the price of eggs, using our example, rises too high. This is the notion of elasticity of demand.  Each individual actor has a different preference ranking, and that ranking changes constantly. It is impossible for any human to “plan” out or predict what those rankings will be for millions of individuals.

Other Economic implications from the Luxury Tax of 1990

The Luxury tax bill of 1990 was passed into law in the hopes to generate more tax revenue for the U.S. Government. However, the tax revenues fell short.  After the first year of its roll out, the tax revenues, due to this tax, was about a few tenth of a million dollars. (Pin, 2011) This is not shocking since many of the firms went bankrupt, shut its operations down, or lost revenues.  Ironically, since there were layoffs due to this tax law, the number of unemployment claims rose during this time period.  The explicit cost to the U.S. Government thanks to the job losses from this law was approximately $24.2 million in unemployment benefits. (Will, 1999)  This shows a double whammy for the U.S. Government: There was a short fall in tax revenues, and the Government had increased cost thanks to paying out unemployment insurance to displaced or unemployed workers.
It should also be noted that during this time period, the United States was suffering from a recession. This also impacted the luxury item industry. However, the “solution” would not be raising taxes on these items during this time period. The proper “solution” would be lowering the taxes to encourage growth and economy expansion.  Raising taxes during this time period simply strengthens the argument on how taxes impact business owners.


The economic impacts of the luxury tax of 1990 are quite clear. This version of a consumption tax demonstrates the ill effects of a consumption tax.  Politicians will sell the citizens on the notion of a consumption tax is “better than” an income tax. Just recall the Luxury Tax of 1990 any time the notion of a consumption tax is raised.  The results will be similar, yet it will spread through the entire economy quicker, since it will impact all good/services sold.   It also will not be passed forward to the consumer, but the economic cost will be pushed backwards to the business owner. Regardless if it is a sales tax on specific items, or all items, the tax will impact those original factors of production: Land, Labor and Capital.

Works Cited

Pin, L. (2011, March 10). U.S. Luxury Tax-A Total Failure. Watching America.
Salpukas, A. (1992, Febuary 7). Falling Tax Would Lift All Yachts. New York Times.
Wall Street Journal. (2003, January 3). Good Riddance to The Luxury Tax. Wall Street Journal.
Will, G. (1999, October 28). Tax Break for the Yachting Class. Washington Post.
Woof, S. M. (1991). A Corporate Perspective on the Revenue Reconcilliation Act of 1990. Journal of Corporate Accounting and Finance.

Dr. Joe Salerno: Will Presidential Candidates Talk about Money?

Wednesday, January 13, 2016

Venezuela's Bizarre System of Exchange Rates | Mises Daily

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Tax Loopholes vs Government Subsidies

Many individuals confuse the notion of Tax Loopholes and Government Subsidies. Typically, these two are confused in the conversation of "big business" getting special favors from the Government. While it is true that many larger firms rent seek, or lobby, the US Government for subsidies, this does not mean both Tax Loopholes and Government Subsidies are the same.

What is a Subsidy? 

A Subsidy is a direct payment received from the US Government. For example, some farmers receive subsidies from the US Government to operate their operation. Of course, this has adverse consequences on the economy. The subsidy is paid from the US Government. Prior to that, the subsidy is underwritten by the Tax payers. However, the farmers receive the direct benefit of the subsidy. Since the funds are re-distributed from the tax payers, to the farmers, this causes economic havoc in the marketplace. Resources are not allocated to their highest uses, as the folks in Washington DC make the choice on how resources are allocated, not the actors in the marketplace using the price system.

What are Tax Loopholes? 

Tax Loopholes are simply ways, as per the law, for individuals to keep reduce their tax liability. This simply means they are not due the same amount of tax liability, based upon the individual's use of the tax code. This differs from a Subsidy in the fact that a subsidy is a direct transfer payment, and the use of a Tax Loophole is not a direct transfer. Moreover, use of a Tax loophole is an opportunity of the individual to keep more of his/her personal property. Recall: The US Government's role is to protect individual liberty and individual property rights. Also, this allows business owners to invest more of their profits back into their operation. Reducing the economic costs allows more firms to enter the marketplace, subsequently, it provides the consumers more choice.


Subsidies do more harm to the economy, in the long run, as compared to Tax Loopholes. Subsides create much more economic havoc, as it can be detailed out in another article. Tax Loopholes, on the other hand, simply allow citizens to keep more of their private property. This makes more sense because individuals are better suited to make choices for their happiness.

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